Should I cash out my IRA during a divorce?

On behalf of Stange Law Firm, PC posted in High Net Worth Divorce on Thursday, May 24, 2018.

Missouri spouses considering divorce know it is certainly not an easy decision to make, or an easy process to get through. Another significant hurdle in the process of dividing your lives into separate pieces is the division of assets. Divorce is a financial decision as well as an emotional one, and it reaches beyond choosing which spouse winds up with the house and car.

FINRA, the Financial Industry Regulatory Authority, advises divorcing spouses to consider all your options before cashing out retirement accounts. It may seem simpler and easier to liquidate everything, but retirement assets are critical to maintaining as a supplement to Social Security, which may not provide sufficient funds for retirement.

If you have doubts about your spouse making withdrawals from a joint investment account or making investments without your input, your first action should be to safeguard the funds. Contact your broker or fund manager and ask to freeze the account until you can both agree how to split the assets. Even if one spouse has more retirement savings than the other, the assets can still be divided equitably and rolled into separate accounts. In fact, it is a common practice.

Before selling assets, think about penalties you may face for early withdrawal, as well as taxes that may apply. Selling securities may attach taxes on capital gains, and for annuities, penalties for early withdrawal from an investment can carry significant penalties. Another consideration is the economy. If you make these changes during a market slump, your investment likely is not worth as much.

Methods for splitting the funds differ with the type of investment account you have. For brokerage funds, a letter from the couple directing fund managers how to break the assets into separate accounts is typically enough. For IRAs, financial organizations may want a copy of the divorce decree and draw up distribution forms for each spouse to approve.

To divide 401 (k) investment programs that are provided by an employer, you need to present a court order to the plan administrator. Along with your wishes, the plan manager has guidelines to follow in dividing the assets as well. He or she may offer a spouse–who is not an employee–the option of opening an individual account and remain in the plan, while another manager may require the spouse to leave, either rolling the money into an IRA or taking a lump-sum distribution without penalties.

Dividing your investments during a divorce can be daunting, so consider seeking guidance from a financial advisor or an attorney with investment and estate-planning experience.

This article contains valuable information about financial matters during a divorce. However, it is not to be considered legal advice.

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